SPACs continue to advance as trust-based partnerships

The rise of Special Purpose Acquisition Companies (SPACs) as a way of accomplishing reverse mergers and public listings is an ongoing development that has drawn the attention of investors that poured roughly three-times more in the space in 2020 than in 2019 with $64 billion in capital inflows. Regulators are watching too and to be sure activity remains brisk this year as well. Last Friday (March 26), WeWork announced that it will finally become a publicly listed company, thanks to the magic of SPACs. The flexible-workspace unicorn that crashed spectacularly just two years ago was left for dead by the business press after it pulled out of a much-hyped initial public offering. Now, it will merge with BowX Acquisition Corp. in a transaction that values WeWork at approximately $9 billion. Qualitative trumps quantitative. This is primarily a trust-based partnership. John Traugott, Credit Suisse So what is new in this latest round of SPACs? A recent webinar held by InterPrivate LLC, a private investment firm founded by Ahmed M. Fattouh, sought to provide a more intimate look at what is going on behind the scenes at these IPOs. The meeting came at a came at a big moment in InterPrivate’s corporate history, because its first SPAC, InterPrivate Acquisitions, just closed on a merger with Aeva, a high-tech firm founded in 2017 by former Apple engineers dedicated to the sensing and perception software for autonomous vehicles. Only days before, too, InterPrivate LLC had closed on the initial public offering of three separate successor SPACs -- aptly named InterPrivate II, III and IV -- which are dedicated respectively to technology, fintech, and digital infrastructure. Those IPOs raised $800 million. Two of the new entities will trade on the NYSE, one on NASDAQ. The webinar had a celebratory tone, especially the first half, called “Anatomy of a SPAC Transaction,” which was devoted specifically to discussion of the Aeva deal. Credit Suisse Securities had served as placement agent on the IPO of InterPrivate Acquisitions, and John Traugott, managing director at Credit Suisse, participated in this part of the webcast. A SPACs manager must of course do its due diligence when deciding on a merger partner. Brian Pham, co-manager of the first InterPrivate SPAC, said happily that his due diligence had found that Aeva’s technology “is head and shoulders above what anyone else is doing.” Machines as they become autonomous, he explained, are going to have to do three things: think, communicate, and perceive the world around them accurately. A self-driving car has to see that an elderly person with a cane is crossing the road before the next intersection in order to brake in time. The perception part of the equation is, as Pham said, a green field yet, and InterPrivate wanted to get in on it. Asked what factors lead a SPAC in its choice of a merger partner, Traugott said, “Qualitative trumps quantitative. This is primarily a trust-based partnership.” Traugott also said, “The economic equation makes sense in being able to produce a massive outcome that is worth waiting for, because this [autonomous vehicle design and manufacture] is a large scale industry.” Saroush Salehian, one of the founders of Aeva, said that Aero is “fortunate to have the right partners on both the VC side and the public market side.” Traugott’s phrase, “trust-based partnership,” evokes WeWork in an ironic way, because trust is exactly what failed between WeWork founder Adam Neumann and his original investors, especially SoftBank. A private funding round led by SoftBank once valued WeWork at $47 billion: a number that puts into context the $9 billion valuation of the BowX deal. The second half of InterPrivate’s webinar, “The Evolving SPAC Landscape,” broadened the focus a bit. It included a new set of panelists, who were: Regina Lawrence Savage, head of Autotech I-banking, Morgan Stanley and John Tuttle, vice chairman and chief commercial officer for the New York Stock Exchange. The Aero deal was still on the minds of the participants, though, and Tuttle began his own remarks by congratulating Aero on “this big step in your journey.” Then Tuttle offered a capsule history. “We [the NYSE] started listing SPACs in a meaningful way in ‘18. Then we thought in ‘19 we had hit the top of the market.” But 2020 proved that impression wrong. He seemed to give SPACs some credit for helping the market demonstrate its robustness in the fact of that often awful year. After all, SPACs were the first activity to turn back up after the scary Covid-inspired drop in March. From a peak near 30,000 in February, the Dow fell to below 19,000 by the end of March. But in April, when a digital sports entertainment company, DraftKings, merged with SPAC Diamond Eagle Acquisition Corp. and SBC, receiving in the process new investment from Capital Research & Management, Wellington Management and Franklin Templeton. This was a welcome sign that the world had not actually screeched to a halt. In June, Nikola, a hydrogen powered truck maker, went public by way of a merger with a SPAC, VectoIQ. The deal attracted a lot of attention: perhaps too much. It got nearly to $80 a share on the initial excitement. This attracted shorts and short-subsidized research suggesting that there was less to Nikola than met the eye. As of late March 2021, the stock price is down to $14.10. The takeaway from what Savage of Morgan Stanley called “the Nikola story” is that SPAC mergers are not a magic elixir, and they are not for every investor. They should be considered, though, by long-term investors who have the patience to wait out the headline bumps and bruises. WeWork’s bumps and bruises, and its belated entry into the public markets at last, certainly help to illustrate that point. The CEO of WeWork, Sandeep Mathrani, told a CNBC interviewer, “Sometimes you don’t pick a path…a path picks you. In December, we were approached by BowX and other SPACS.” One other quite recent deal is worth noting. The private equity firm Thoma Bravo announced on March 20 that it will acquire ironSource, a mobile monetization start-up. The announcement also set a record eleven-digit value for this ($11.1 billion), with $2.3 billion changing hands. With due regard for the risks and challenges that arise in any trust-based partnership, the overall picture is that, as 451 Research, the global advisory firm, has put it, “the numbers right now are headed in one direction: higher.”

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SPACs continue to advance as trust-based partnerships

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Christopher Faille

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